IPG Photonics is a maker of fiber lasers which are used in a wide variety of industries for welding, cutting, drilling and etching. They is used across all industries which gives IPGP the potential to continue capitalizing on its market.

Here are some video demonstrations that will immediately help you understand what fiber lasers do.

Continues to increase gross margins. It’s in the 54% range compared to 49% the year before as a result of reducing cost of goods sold.

Plenty of cash on balance sheet with big decreased in debt. Current ratio of 5.3.

High ROE of 19% and CROIC of 45%

Lowlights

Fundamentally, IPGP doesn't have many weaknesses. It is solid. The only concern is the valuation.

Share count increases every year

CEO is 73 years old, owns more than 40% and the business depends on him

Laser prices are going down which could lead to a drop in margins

Valuation

Valuing IPGP is difficult because the company has never been at a consistent level. From 2005 to 2009, IPGP was in growth and investing mode. It wasn’t until 2010 when the company started to really reap rewards and the growth has been huge since then.

Thus the difficulty in trying to come up with a fair value.

Discounted Cash Flow

FCF isn’t a good metric to use for IPGP because of the heavy investment during its growing phase. Capex in 2005, 2006 and 2007 was $16 million, $20 million and $34 million, respectively. Those are some big jumps.

For IPGP, owner earnings is the better number to use as it eliminates working capital and adds back items such as depreciation and deferred taxes that should not be included.

IPGP has also performed extremely well over the past 5 years compared to its history. It has achieved an organic 15.4% ROE coming from healthy margin increases. See the DuPont analysis to see how it is calculated and download the spreadsheet too.

Using a discount rate of 12% and a growth rate of 16%, I get a value of $70.

Graham Valuation

Analysts are predicting an EPS of $3.16.

Using the Ben Graham formula, I get a value of $83.

Katsenelson PE Valuation

The current PE of 23 assumes that IPGP has an expected growth rate of 25%.

I believe this is too high so I’ve made an adjustment by entering the starting PE to equal 20% earnings growth which has been the historical growth rate.

United Therapeutics is a biotech company that focuses on developing drugs for small niches with unmet needs. Their main drug targets a high blood pressure disease between the heart and lungs. The disease occurs in young woman with an estimated 30,000 being treated in the United States.

It’s a small market and because of the unfulfilled needs, the pricing power is astronomically high.

Highlights

Average revenue growth of 37% for the past 10 years but slowed down to 23% the past two years

100% recession proof

Reduction in SG&A

Lowlights

R&D investment is decreasing

Increased long term debt despite strong financial position

Lots of gains in the “non cash items” line

Repurchased a big chunk of stock at its highest stock price

Valuation

I am going to admit that I don’t know how to value UTHR.

The company has experienced huge growth but there are some signs of slowing down. What’s more, for the growth, the finance ratios also fall into value territory.

Air Methods is the largest provider in the air medical transportation industry. It’s a good business. People need emergency transport services and if you live in a rural area, you need air transport to quickly get you to a hospital.

The business is not easy to replicate either. You need a fleet or helicopters, national network of bases and pilots and trained medical staff.

Like United Therapeutics, you can see why Air Methods business is consistent and recession proof.

ROE of 30% (more on this below and why a high ROE is included in the lowlights)

Some Ratios

PE of 22

EV/EBITDA of 25

Price to tangible book value of 19

Piotroski score of 8

ROE of 30% due to increases in debt

For most solid companies, ROE and CROIC come out similar. For AIRM however, ROE is much higher than CROIC. Upon looking at it further via the DuPont analysis, it shows that a major source of AIRM’s ROE comes from its debt increase. ROE is increasing due to debt.

If I adjust the equity multiplier in 2010 from 3.73 to a normal value of 2.6, the ROE drops to 21.6%. Still good, but it is much lower than 31% showing that ROE is likely inflated at the moment.

Lots of accruals in the balance sheet and cash flow statement. A high balance sheet accrual also leads to a high ROE.

Low Piotroski score of 5

Dividend yield is a tiny 0.36%

Highly dependent on a small number of customers

Just by looking at the company quickly, the numbers can look too good to be true

Valuation

With such strong fundamentals and exponential growth to date, how do you go about valuing a company like SYNT?

It obviously has excellent numbers but would I confident in assigning a growth rate of around 20% going forward?

If I’m going to assume an aggressive case of 20% growth, then the valuation I get is around $130 using the DCF method, $136 using the Graham formula and $100 with the Absolute PE method.

That’s about a 80 – 100% upside from current prices.

Other competitors are of lower quality but priced higher, so if you do a relative valuation, the fair value is around $80.

Doing an EBIT valuation which only looks at a maximum of one year going forward, the valuation range is between $32 to $72.

That’s a wide valuation range, and at this point, I’d rather keep an eye on it to see what a normal operating business level is as opposed to riding the wave up not knowing when it is going to end.

That goes for the rest of the stocks mentioned here. High flying companies that are operating at its peak so there could be a chance that it will come down at which point it would be a very compelling investment opportunity.

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